Digital taxes to test Kenya-US trade deal

digital service tax
Ukur Yatani has proposed to introduce digital service tax on the value of transactions at the rate of 1.5 percent. FILE PHOTO | NMG 

Technology firms using the internet to market and sell products will pay a tax at the rate of 1.5 percent of the value of transactions in a proposed change to the Income Tax law to cut down on revenue leakages.

Treasury secretary Ukur Yatani in the Finance Bill before the National Assembly hopes to rope in a piece of the revenues derived in Kenya by tech firms, which are mostly based outside Kenya.

The tax may put Nairobi on a collision course with Washington where the protectionist Donald Trump administration has opposed taxing revenue generated by tech giants such as Google, Apple, Facebook and Amazon.

That may feature in ongoing talks between the two countries over a new trade deal ahead of the current pact under Agoa framework that expires in less than five years.

"I propose to introduce digital service tax on the value of transactions at the rate of 1.5 percent," Mr Yatani said in his Budget statement to the National Assembly on Thursday.


Online businesses do not necessarily have physical addresses or legal structures in the jurisdictions they operate, making it easy to escape the taxman’s noose as well as counties which issue business permits.

"While the intention of the provision appears to bring into the Kenya tax net non-residents that operate digital marketplaces, the provision is restricted to apps that ‘derive and accrue’ such income from Kenya," consultants at audit and consultancy PricewaterhouseCoopers (PwC) wrote in a note on the Bill.

"Given that most non-residents arguably do not derive nor accrue their income from Kenya (as contrasted to sourcing their income from Kenya), the drafting may potentially result in legal disputes as to its applicability to non-resident digital marketplaces."

The Kenya Revenue Authority (KRA) had said it will work with the Communications Authority of Kenya (CA) to obtain data on transactions by resident and foreign-based app developers doing business in Kenya.

“Working with the Communications Authority (of Kenya), we should be able to get the data. But we leave in a self-assessment period and expect that if you are generating revenue of that much, you self-declare so that you don’t pay extra penalties,” Deputy Commissioner for corporate policy Maurice Oray said in a past interview.

Besides income generated by firms in the digital marketplace, Mr Yatani is also looking at taxing people who buy goods and services online after he published draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020.

Electronic services such as downloadable and subscription-based digital content such mobile applications, e-books and movies, news, magazines, journals, streaming of TV shows and music, podcasts and online gaming will attract 14 percent VAT under the draft guidelines.